Cain Reveals 9-9-9 Math With Projection of No Revenue Loss

Herman Cain participates in a presidential debate sponsored by Bloomberg and The Washington Post held at Dartmouth College in Hanover, New Hampshire on Tuesday, Oct. 11, 2011. Photo: Scott Eells/Bloomberg

Oct. 12 (Bloomberg) -- Republican presidential candidate
Herman Cain’s 9-9-9 tax proposal would generate as much revenue
for the U.S. government as the current tax system does,
according to an analysis released by his campaign.

With a 9 percent tax rate for sales and gross income for
individuals and businesses, the U.S. would have collected about
$2.3 trillion in 2008 had the tax been in place. That’s on par
with the amount the federal government collected that year,
excluding excise taxes and user fees, which Cain would retain,
according to his analysis.

The figures were provided today to Bloomberg News in an e-mail from Rich Lowrie, who Cain said yesterday in the Republican
presidential debate was his “lead economist on helping to
develop” the proposal. Cain’s plan would replace the current
tax code with a 9 percent national sales tax along with 9
percent levies on gross income for businesses and individuals.

During the debate yesterday with other Republican
presidential candidates in New Hampshire sponsored by Bloomberg
News and the Washington Post, Cain said the proposal is his top
policy goal. He said it would simplify the U.S. tax system
without generating less revenue than the current code does.

“It expands the base,” he said during the debate. “When
you expand the base, we can arrive at the lowest possible rate,
which is 9-9-9.”

Ending Deductions

Those expansions of the base mean that long-standing tax
breaks, such as the mortgage interest deduction and the
exclusion from income of employer-sponsored health insurance,
would likely vanish to keep the rates lower.

Before Cain’s campaign provided the analysis today,
Bloomberg News had calculated that the proposal would have
collected almost $2 trillion if it were in place in 2010. The
U.S. actually collected almost $2.2 trillion in taxes that year.

Cain has previously said an independent group conducted an
analysis of his plan, though his campaign didn’t share the
results of that study until today. The analysis, conducted by
Fiscal Associates Inc., used economy-wide data to project the
size of the tax base for each of the three planks of the plan.

The estimate projected a tax base of $9.5 trillion from
businesses, $7.7 trillion from individuals and $8.3 trillion
from sales. With the 9.1 percent rate he uses, that would
generate $862.6 billion in tax revenue from businesses, $700.8
billion from individuals and $752.6 billion from sales.

‘In the Ballpark’

Alan Viard, a senior fellow at the American Enterprise
Institute in Washington, which favors smaller government, said
the revenue estimates were “in the ballpark in some vague
sense.” Viard said the rate might need to be a percentage point
or so higher to generate the same amount of revenue that the
current tax code does.

The estimate, he said, includes too small of an adjustment
for underreporting of income and sales. It also doesn’t reflect
that federal revenue in 2008 was lower than average or attempt
to project the federal government’s future spending needs.

The public appeal of the 9-9-9 plan has propelled Cain to
the top ranks of the Republican presidential contest. Other
candidates used yesterday’s debate to put him on the defensive
over the plan’s details.

Former Senator Rick Santorum of Pennsylvania during the
debate said the 9-9-9 proposal is “naively” designed.
Representative Michele Bachmann of Minnesota said it would
provide Congress with a new layer of revenue to manipulate.

Gives Congress ‘Pipeline’

“The last thing you would do is give Congress another
pipeline of a revenue stream,” she said. “And this gives
Congress a pipeline in a sales tax.”

Viard said Cain’s description of the business tax has been
misleading as it is nothing like the current corporate income
tax, which applies only to profits of companies organized as
corporations. The Cain tax would operate as a value-added tax
similar to those in the rest of the industrialized world, which
Republicans have often opposed.

“The elephant in the room is the fact that Cain is
proposing a value-added tax,” said Viard, a former economist at
the Federal Reserve Bank of Dallas who says a VAT will be
necessary to cover the government’s long-term fiscal needs.
“The question of whether the revenue numbers add up is almost
secondary to that.”

The analysis released by the campaign doesn’t address how
the proposal would change the distribution of the federal tax
burden, other than including a provision for some sort of
“poverty grant,” which Cain has described as a lower rate in
targeted “empowerment zones.”

Shifting Tax Base

Without the poverty grant, the rate for each of the three
taxes could be as low as 7.3 percent, the analysis said.

Other tax experts have said Cain plan’s switch to a tax
base that leans more heavily on consumption would shift the tax
burden down the income scale.

“The absence of current law’s package of a standard
deduction, personal exemptions, child credit, child care credit
and the earned income tax credit means a huge tax hike for the
working poor and a substantial tax increase on the labor income
of the middle class,” wrote Edward Kleinbard, a law professor
at the University of Southern California, in an Oct. 10 paper
about Cain’s plan. “At the same time, the all-in 27 percent tax
on labor income (or less for the self employed) would constitute
a tax reduction for the very highest-labor income Americans.”